Barrister Equipment Assocs. Series #115 v. Commissioner
| Decision Date | 09 May 1994 |
| Docket Number | Docket No. 23263-89. |
| Citation | 67 T.C.M. 2932 |
| Parties | Barrister Equipment Associates Series #115, Barrister Associates, Tax Matters Partner v. Commissioner. |
| Court | U.S. Tax Court |
Nathan M. Silverstein and Kurt F. Zimmerman, for the petitioner. Andrew M. Winkler and D. Lyndell Pickett, for the respondent.
Memorandum Findings of Fact and Opinion
This case was assigned to and heard by Special Trial Judge Joan Seitz Pate pursuant to section 7443A(b)(4) and Rules 180, 181 and 183.1 The Court agrees with and adopts the Special Trial Judge's opinion which is set forth below.
PATE, Special Trial Judge:
By notices of final partnership administrative adjustment (FPAA's), respondent determined the following adjustments to the partnership returns of income filed by the limited partnership named Barrister Equipment Associates Series 115 (hereinafter Series 115) for the years 1983 and 1984.
1983
Items Adjusted As Reported As Adjusted
Partnership Loss ....... $ 611,449 -0-
Qualified Investment
Credit Property ...... 20,466,000 -0-
1984
Items Adjusted As Reported As Adjusted
Partnership Loss ....... $ 1,217,001 -0-
Qualified Investment
Credit Property ...... 4,354,512 -0-
In the FPAA's, respondent adjusted partnership losses and investment tax credits relating to 46 properties associated with the publication of 44 books and 2 computer programs which Series 115 leased from Universal Publishing Resources, Ltd. (hereinafter Universal). After ruling on certain evidentiary matters, we must decide whether petitioner was entitled to the deductions and credits reported on its 1983 and 1984 partnership returns. Specifically, the issues for our consideration include: (1) Whether Series 115's leasing activities had economic substance, and (2) if so, whether such leasing activities constituted activities engaged in for profit within the meaning of section 183, and (3) if so, whether the debt portion of Universal's purchase price for the properties leased to Series 115 should be recognized for investment tax credit purposes; and (4) if so, whether Series 115's basis in the properties must be allocated between tangible properties and intangible rights.
When the petition herein was filed, Series 115's principal place of business was in Rockville Centre, New York. Some of the facts have been stipulated, and they are so found. Additionally, the parties have agreed that the Court may incorporate into evidence certain portions of the record developed in the proceeding entitled In re MDL-731—Tax Refund Litig. v. United States [91-1 USTC ¶ 50,183], 766 F.Supp. 1248 (E.D.N.Y. 1991), affd. in part and revd. in part [93-1 USTC ¶ 50,173] 989 F.2d 1290 (2d Cir. 1993).
An individual named Irving Cohen (hereinafter Cohen) organized and controlled Universal2 and promoted the transactions involved herein. He received a bachelor's degree in English in 1961 and a master's degree in English Literature in 1962. In 1977, Cohen began investigating the publishing industry and, in 1978, formed a corporation, Jonathan T. Bromwell and Associates, Inc. (hereinafter Bromwell). All of the issued and outstanding stock of Bromwell was held in trust for the benefit of Cohen's children. In 1978, Bromwell purchased 301 literary properties, substantially all of which were published as mass market paperbacks.3
At Cohen's request, in 1981, Paul F. Belloff (hereinafter Belloff) and Robert Gold (hereinafter Gold) formed Barrister Associates (hereinafter Barrister or petitioner), a New York general partnership.4 Belloff and Gold each held a 50-percent interest in Barrister. Barrister is the general partner and tax matters partner of Series 115. As consideration for its efforts in organizing Series 115, Barrister was entitled to an initial fee of $50,000 to $65,000, plus annual fees equal to 3 percent of Series 115's annual cash flow until such time as the limited partners of Series 115 had been credited with net income equal to their capital contributions, and 20 percent thereafter.
Between 1981 and 1983, Barrister organized and was the general partner of a number of limited partnerships, all similar to one another. It organized 29 limited partnerships in 1981, an additional 35 limited partnerships in 1982 (named Barrister Equipment Associates Series 80 through 114, and 300), and another 60 limited partnerships in 1983 (named Barrister Equipment Associates Series 115 through 175, 201 and 302) (collectively referred to herein as the Barrister Partnerships). Barrister served as general partner of 58 of the 1983 partnerships; an entity named Barrister Associates, Inc., was the general partner of the other two.
The Barrister partnerships were organized to acquire and exploit literary and computer program properties, which were purchased or leased, directly or indirectly, from corporations owned or controlled by Cohen. Promotional materials for these partnerships stressed that investors who acquired limited partnership interests could recover substantial amounts of money solely by claiming the purported tax benefits associated with the purchase and lease of these properties.
Neither Belloff nor Gold had a background in the publishing industry before Cohen approached them about forming Barrister. Consequently, Cohen, his employees and associates, and the entities he directed or controlled,5 furnished Belloff and Gold with almost all of the expertise and services necessary to promote and operate the numerous limited partnerships enumerated above. With regard to Series 115, they provided Belloff and Gold with copies of pertinent documents, selected the books Series 115 would lease, acted as liaisons with the publishers, prepared a copy of a brochure that summarized the offering (hereinafter the Summary Brochure) and a Private Placement Memorandum (hereinafter the Offering Memorandum), provided bookkeeping services, reviewed the records of sales kept by the publishers, and provided monitoring services. Cohen even paid part of the salary of an officeworker who had signature stamps for Belloff and Gold, which she used to sign letters composed by Cohen.
Universal acquired the properties it leased to Series 115 from several publishers. For this purpose, Cohen used form acquisition agreements which provided that Universal purchased certain "physical properties" to be used in printing the books. The properties consisted of:
a number of engraved plates and/or lithographic films each embodying forms of either 32 or 16 pages of the text of the Literary Work and other pages to be included in the printed book; four color processed engraved lithographic films embodying the front cover art work for the printed book; and four color processed engraved lithographic films embodying the spine and back cover art work for the printed book, it being understood and agreed that no original artist's rendition is included in the above.
The above quoted paragraph describes the 44 properties purchased by Universal that were used to produce books. Universal also purchased two properties (disks) used to produce computer programs. Hereinafter, the term "properties" will refer to properties used to produce both books and computer programs.
The publishers solicited by Universal had agreements with various authors. In a typical example, the author of Worstward Ho sold exclusive rights to print, publish, and sell his work to Grove Press, Inc. Grove Press agreed to pay the author an advance of $1,000-$500 on the date of agreement and another $500 on publication. Additionally, for sales in the United States, Grove Press agreed to pay the author royalties at the rate of 10 percent of the retail cover price on the first 5,000 copies sold, 12.5 percent of the cover price on the next 5,000 copies sold, and 15 percent of that price on all copies sold thereafter.
Universal's negotiations with publishers, in particular Richard Gallen (hereinafter Gallen),6 generally centered around the cash portion of the transaction. With few exceptions, Universal acquired each of the 46 properties with cash downpayments of approximately 2 to 5 percent of the total purchase price of each property. For the 95 to 98 percent balance, Universal would execute a large promissory note. Gallen, who saw the proposed amount of purchase price for each property, which included the debt, for the first time only when he received the acquisition agreement from Cohen, usually signed off on the proposal without any further negotiation. Gallen wanted the acquisition agreements to provide for a large amount of debt so that he would be able to keep substantially all of the publisher's revenues7 from the books and computer programs. Because the purported debt was so large, the publishers were virtually guaranteed that they would retain substantially all of the revenues from the sales of the books and computer programs even if they should become best sellers.
Universal purchased the properties it leased to Series 115 consisting of 44 books and 2 computer programs for a total price of $25,644,000 (See Appendix D). The books included hardbacks for children, teenagers, and adults, and mass market and trade paperbacks produced from original manuscripts and reprints. They included game, puzzle, comic, cartoon, art, text, reference, biography, poetry, mystery, adventure, thriller, western, science fiction, historical account, and historical fiction books. Titles of these computer programs and books are listed in Appendix A.
Universal paid the total purchase price by making a cash downpayment of $710,100 and executing "recourse" notes totaling $24,933,900 which bore simple interest at a rate of 9 percent per annum. For the first 12 years, Universal was required to make payments on the notes only from the revenues. Specifically, the notes,...
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